Perspectives on where our world is heading from a vantage point in Denver, Colorado.

08 January 2010

Employment Situation Still Dire; CRE Weak

The percentage drop in the number of people employed from the pre-recession peak is now the worst of any post-Great Depression recession and has been getting worse for twenty-four straight months, putting it on track to be long longest post-Great Depression period of declining jobs. The recessions of 1981, 1990 and 2001 had not recovered to pre-recession peaks in 24 months, but those of 1981 and 1990 were well on their way to recovery after that many months, and the 2001 recession job decline (the longest, but much less severe, 2.0% at its worst v. 5.2% now) was just bottoming out after 24 months.

Nonfarm payroll employment edged down (-85,000) in December, and the unemployment rate was unchanged at 10.0 percent, the U.S. Bureau of Labor Statistics reported today. Employment fell in construction, manufacturing, and wholesale trade, while temporary help services and health care added jobs.

Employment as a percentage of the population is the lowest it has been since 1983, before the move of women into the work force had run its course, and we are less than a percentage point short of the post-Depression record 10.8% unemployment rate hit in that recession. The number of people who are working part-time because they can't find full time work (9.2 million) is just slightly short of the all time high set in October 2009.

There are continued signs of weekness in other parts of the economy as well. Apartment vacancies are at record highs, which is producing low rents, but means that any new apartment construction is probably far in the future.

Vacancies are up and rents are down for other typees of commercial property as well, compared to a year ago: "Industrial properties saw vacancy rates rise from 9.8 percent to 13.0 percent; office properties saw a rise from 16.0 percent to 19.4 percent and retail vacancies rose from 12.9 percent to 18.6 percent." Strip mall vacancies are also at a record high of 10.6%. Hotel occupancy rates are also at a post-Great Depression low this year. Even though the owner owned housing market appears to have hit bottom (although home buyer credits may be skewing the numbers), commercial real estate prices continue to fall. So, the commercial real estate construction market is dead for the foreseeable future.

Furthermore, while housing prices appear to be starting to stabilize a new lows in most real estate markets (a few are still falling), the subprime mortgage market remains a dim shadow of its former self, so the prospect of owning a home rather than renting one for people with poor credit (including the legions of home owners who have recently experienced foreclosures), is close to nil. So, when the housing market does eventually recover, affordably priced subdivisions are unlikely to have the large market share of that recovery that they had in the pre-financial crisis housing boom.

Of course, no economic trend is universally bad for everyone. Low apartment rents are good for renters, and American renters can certainly use some relief. Cheaper commercial real estate is stimulus for the businesses who rent it, and these businesses likewise need it. Reduced construction tends to imply reduced environmental harm from construction activities, and a glut of unemployed construction workers makes the renovations and construction that does happen cheaper to do. A glut of construction workers, in particular, and a weak employment market generally, also reduces or reverses immigration which had previously been an economic and social flash point as it reached record highs.

Some sectors of the economy, like energy and farming, are doing reasonably well at the moment and require employees with skills similar to those of construction workers, so highing in these industries could offset some portion of lost construction industry jobs. Construction jobs are also jobs that are particularly easy to create with government action through public works.

The owners of real estate generally tend to be people with above average wealth, and the owners of commercial real estate in particular tend to be people with wealth far above average, so declining property values effectively redistribute wealth from the rich to the less affluent (more rapidly and efficiently than government programs and without the intervention of government). Inequalities of wealth in the United States had previously reached record highs.

The distortions that preferential tax treatment for unearned income generally, and for capital gains, in particular, creates, is also muted when unearned income is down due to low interest rates and falling asset prices. A low tax rate on capital gains doesn't mean much when you are selling your investments for less than the purchase price.

The big problem, however, indeed it is a society crisis, is that the United States has a very weak social safety net. Our society is not equipped to let faultless long term unemployed workers sustain themselves with a modicum of dignity and meet their basic needs for long periods of time. Private savings to allow workers to whether hard times were also at record lows before the financial crisis hit. A stunning number of households in the United States are now trying to survive on nothing but food stamps. There has to be a better way to have an incentive in our economy to work without utterly abandoning those who have a misstep along the way.